Infrastructure Bill & Cryptocurrency: What Congress Needs to Clarify

Infrastructure Bill and Cryptocurrency Taxation

President Joe Biden’s recently enacted $1 trillion infrastructure bill incorporates stipulations concerning the taxation of cryptocurrency transactions, projected to yield approximately $2.8 billion annually for the U.S. government.

However, this revenue estimate represents a relatively modest sum in the broader context of the bill’s overall cost.

Ambiguity in the Legislation

A significant concern lies in the imprecise wording of the crypto tax provisions within the law. This lack of clarity introduces the potential for hindering the growth of the cryptocurrency sector.

The bill stipulates that “a brokerage” is responsible for tracking these transactions. However, direct engagement with smart contracts often bypasses traditional brokerages, raising questions about accountability for reporting in such instances. Could a miner, for example, be classified as a brokerage?

It is universally acknowledged that profits derived from cryptocurrency trading should be subject to taxation, similar to other investment gains – typically upon liquidation or transfer of assets. Nevertheless, the existing ambiguity carries the risk of trading platforms restricting access for U.S. citizens or discouraging smaller investors from participating in the market.

Historical Precedent: FATCA

Past experiences, such as the implementation of FATCA (Foreign Account Tax Compliance Act), demonstrate this potential outcome. Certain financial institutions opted to deny services to U.S. citizens due to the excessive compliance burdens relative to the perceived benefits.

Complex Scenarios Requiring Clarification

Several scenarios, ranging in complexity, necessitate careful consideration:

• Using bitcoin to purchase a car would trigger a taxable event at the point of sale. This is a relatively straightforward application of tax principles.
• Acquiring Ether through a cryptocurrency exchange using U.S. dollars presents a similarly uncomplicated taxation scenario.
• However, transferring cryptocurrency into a smart contract utilized for holding a Non-Fungible Token (NFT) that is subsequently purchased by others introduces significant complexities, potentially subjecting individuals to tax obligations akin to those faced by corporations.

A $10,000 threshold, inherited from the Bank Secrecy Act, dictates reporting requirements. Transactions falling below this amount are exempt, but $10,000 remains a relatively low value to necessitate navigating a complex tax situation.

Potential for Discouraging Investment

The administrative burden of tax reporting for both platforms and investors could stifle further investment, ultimately diminishing the anticipated tax revenue, or at least significantly reducing it.

Furthermore, auditing these taxes could prove challenging for the IRS. Establishing a link between identities and transactions will be crucial, a process already implemented on platforms like Coinbase, but typically absent for individual miners.

An Unusual Legislative Approach

This bill is notable because, unlike typical tax legislation which is refined over time, this one appears to have proceeded in reverse. Congress initially focused on the desired revenue target ($1.1 trillion) and then sought to identify tax sources to meet that goal.

This approach represents a departure from traditional practices, where policymakers historically prioritized specific program funding and then minimized associated costs. Recently, both political parties have emphasized promising larger expenditure figures while in power. (Former President Trump also proposed a $2 trillion infrastructure bill, though it was never enacted.)

Political Disconnect

The current political landscape is characterized by a degree of inconsistency. Mayors of major cities, including Miami and New York, representing diverse political viewpoints, are exploring accepting salaries in cryptocurrency. Simultaneously, the federal government lacks a clearly defined long-term strategy regarding this emerging asset class.

The Need for a Comprehensive Strategy

Cryptocurrency is poised to remain a significant force in the financial landscape. The federal government must prioritize developing a well-informed approach through consultation with experts, including economists, academics, and developers of cryptocurrency platforms.